Netflix Posts a Win, but Subscriber Additions Slow

Netflix Inc. (NASDAQ: NFLX) reported second-quarter 2013 results after markets closed today. For the quarter, the video distribution company posted adjusted diluted earnings per share (EPS) of $0.49 on revenues of $1.07 billion. In the same period a year ago, the company reported EPS of $0.11 on revenues of $889 million. Second-quarter results compare to the Thomson Reuters consensus estimates for EPS of $0.40 and $1.07 billion in revenues.

In the company’s letter to shareholders, Netflix says U.S. streaming subscriber numbers grew to 29.81 million. Internationally, streaming subscriber numbers grew by 610,000 to 7.75 million. Neither of these numbers is particularly impressive, for, as the company notes, competition is increasing and improving as well, “and the risk of U.S. market saturation only grows as we do.”

Subscribers to the company’s DVD-by-mail service declined from 7.98 million in the first quarter to 7.51 million, a loss of 47,000. The DVD service’s contribution to profits dropped by 19% year-over-year, and Netflix expects full-year margins to be approximately equal with first-half margins..

For the third quarter of 2013, Netflix forecast EPS in a range of $0.30 to $0.56. The consensus estimate for the quarter has called for EPS of $0.45 on revenue of $1.1 billion.

Regarding its original programming, Netflix noted that the book value of its current content library amounts to about $3 billion, of which around 5% is allocated to its own original shows.

The company’s statement about subscriber additions is particularly disheartening. It’s almost as if Netflix is saying that it’s about to give up on adding subscribers in the U.S. Its subscriber count of nearly 30 million is less than a third of all U.S. households. That’s a big number, but Netflix should have some plan to attack the other two-thirds and that plan, if one exists, is hidden.

Netflix shares are down nearly 6% in after-hours trading at $247.70 in a 52-week range of $52.81 to $270.31. Shares closed today at $261.96. Thomson Reuters had a consensus analyst price target of around $214.98 before today’s report.